A cereal company issues coupons that can be exchanged for boxes of cereal.It issues two million coupons that promise the retailer who redeems the coupons $1 per coupon.The probability of redemption of any one coupon is 10%. What is the amount of the liability that the company recognizes?
A)$2,000
B)$20,000
C)$100,000
D)$200,000
E)$2,000,000

Question

Quizplus · Accepted Answer

The liability recognized by the company will be the expected value of the amount that will be paid out to retailers who redeem the coupons.

Expected number of coupons redeemed = (Probability of redemption) x (Total number of coupons issued)

Expected number of coupons redeemed = 0.1 x 2,000,000 = 200,000

Amount of liability = (Expected number of coupons redeemed) x (Amount paid per coupon)

Amount of liability = 200,000 x 1 = $200,000

A Cereal Company Issues Coupons That Can Be Exchanged for Boxes